Legal & General (LSE:LGEN) shares are down 6.5% over 12 months. So if I’d invested £1,000 in the insurance giant a year ago, today I’d have around £935, plus dividends.
Fortunately for me, buying a year ago I’d have locked in a dividend yield of around 8%. As such, I would have received £80 in dividends.
All in all, my total returns for the year would be 1.5%, or £15. That’s clearly not great. However, it’s not stopping from buying the stock now. Personally, I believe Legal & General is one of the most compelling picks on the FTSE 100.
However today, I’m focusing on one major tailwind.
Bulk purchase annuity
The bulk purchase annuity (BPA) market is a growing one in the UK. BPAs are insurance contracts that allow pension schemes to transfer the liability for their members’ future pension payments to an insurance company. These schemes can help pension providers to reduce risk and to improve financial security.
L&G is among the leading providers of BPAs in the UK. In 2022, it took top spot with the highest buy-in and buy-out volumes with £7.2bn (26% market share).
The insurer also oversaw the two largest deals of the year — two buy-ins totalling £4.3bn with the British Steel Pension Scheme. Over the long run, Legal & General is understood to have around 30% of the market.
That market has expanded significantly in recent years, surging from £10bn in 2016 to over £50bn in 2022. BPAs could turn it into a £100bn market by 2030.
Moreover, industry data highlights that transaction sizes have been growing, rising from an average of £100m in 2016 to over £500m in 2022.
To date, the blue-chip insurer has executed over £100bn in BPA transactions since 2016 and maintains a dedicated team of over 100 specialists focused on the annuity market.
More growth to come
BPAs offer advantages to both pension schemes and insurance companies. They help the former reduce risk, enhance financial security, and release capital for other needs. For insurance companies, BPAs provide a stable, long-term income source and contribute to portfolio diversification.
As such, the BPA market is poised for continued growth. To date, only 15% of the UK’s defined benefit programmes have been transferred to insurance providers. Moreover, with mounting pressure on pension schemes to mitigate risk and bolster financial security, it’s likely we’ll see more demand.
More than dividends
Legal & General has an 8.7% dividend yield which was covered two times by earnings in 2022. But, as I’ve aimed to prove, this insurer offers more than just dividends.
Despite recent poor performance within the LGIM — investment management — business, I’ve been increasing my position in the stock. But I know that if interest rates remain high, this part of the group could continue to struggle.
I’m expecting to see further revenue growth in the coming years which, in turn, should positively influence share price growth and allow for more dividend expansion.
